Divorce is challenging enough, but it becomes especially complex when you own a business. You built your company with time, energy and money. Now you must divide at least a portion of that hard-earned asset.
North Carolina requires a fair division of marital property, a process called equitable distribution. Your first and most crucial step is determining the actual value of your business, a critical process for both spouses’ economic well-being.
Classifying business assets
The law does not automatically classify your entire business as a marital asset. North Carolina law distinguishes between separate property and marital property, a crucial distinction for business owners to understand.
When did you start the company? If it was before the marriage, only the increase in value during the marriage is typically subject to division, which generally includes the value accumulated from the date of marriage to the date of separation.
The valuation process
An accurate business valuation is essential. If you underestimate the value, your former spouse could lose significant future wealth. However, an overestimation can unfairly burden you with a financial obligation you cannot meet.
Spouses rarely agree on the value, and the process almost always requires the services of a neutral, qualified professional. A skilled divorce attorney protects your interests throughout this process by working closely with a certified public accountant or forensic accountant.
The valuation professional generally uses one or a combination of three approaches:
- Market approach: They compare your business to similar companies that were recently sold.
- Asset approach: This method calculates the value by subtracting the company’s liabilities from the fair market value of its assets.
- Income approach: The expert analyzes your company’s ability to generate future income.
Getting the correct valuation is the foundation of a fair property settlement.
Dividing business interests
Once you determine a fair value, either the spouses agree or a court decides how to effectuate an equitable distribution. The goal is to separate the finances fairly so both parties can move forward.
Here are the three most common methods for dividing a business interest:
- Buyout: The owning spouse retains 100% of the business and pays an equitable share, often by exchanging equity in other marital assets, such as the family home, which is the most common method.
- Promissory note: The owning spouse makes one lump-sum payment or a series of payments over time to their former spouse.
- Continuing ownership: Spouses remain co-owners. Due to the potential for conflict, this is rarely recommended but sometimes necessary for very large or complex holdings.
Business valuations introduce extreme complexity and high financial stakes to a divorce. Attempting to value the business yourself can be a significant mistake that can lead to long-term economic problems. Consulting a skilled lawyer who understands how to divide complex assets is vital to protect your financial future.